Metallica Bearings, Inc., is a young start-up company. No dividends will be paid
ID: 2728263 • Letter: M
Question
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend 10 years from today and will increase the dividend by 6 percent per year thereafter. If the required return on this stock is 11 percent, what is the current share price?
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a $12 per share dividend 10 years from today and will increase the dividend by 6 percent per year thereafter. If the required return on this stock is 11 percent, what is the current share price?
Explanation / Answer
Price of share = (Dividend to be paid)/(Ke - Growth rate)
={(12+6%)/(11% -6%)}*PVF(11%,10year)
={(12.72)/(5%)} * 0.3522
={254.40}*0.3522
= 89.60
ABove given formula is used to calculate current price of share but weare given with dividend to be paid after 10 yeras so the calculated price would be price after 10 years so we multiplkiedthat price with Present Value Factor of 10 years to get current price of share as on today.